A Question of Authority and Accountability

The State Supreme Court's MERS ruling could inspire a flood of lawsuits from booted homeowners.

The state Supreme Court last week called into question numerous foreclosures in this state, and opened the door for lawsuits by homeowners given the boot. Just how many foreclosures are we talking about? "Hundreds if not thousands," says Melissa Huelsman, a lawyer representing one of the plaintiffs in the case.

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The case concerns that nebulous entity, the Mortgage Electronic Registration System, known more commonly as MERS. What is known about the Virginia-based company is that it started as a way for lenders to get around costly and time-consuming local deed-recording procedures. MERS, acting on behalf of lenders, instead registered deeds electronically through a centralized system. But MERS' involvement didn't stop there. Somehow, the company also came to be listed as the "beneficiary" of deeds in many states, including Washington. And when it came time to foreclose, MERS often initiated the action.

As the court opined last week, this handoff to MERS "has caused great concern about possible errors in foreclosures, misrepresentation, and fraud. Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult."

Indeed, with MERS as a proxy for lenders, and mortgages being sold and resold, homeowners might not even know who holds their loan. So who do they call to plead for time, check facts or ask for a new loan?

The court, however, didn't need to delve too deeply into those issues in this case, which involves two homeowners facing foreclosures initiated by MERS. The federal judge in the cases asked the Supreme Court for its reading on state law regarding MERS. While courts in some states, like California, have upheld MERS' role, Washington's Supremes say our law is straightforward: "If MERS does not hold the note, it is not a beneficiary."

Huelsman says the ruling has implications for more than MERS foreclosures. The court is saying that anybody other than the note holder cannot foreclose, she says. And that applies to so-called "servicers"—usually banks that collect mortgage payments on behalf of the note holders, and often handle foreclosures too.

Letting servicers handle foreclosures is a bad idea, Huelsman asserts, because many of them "don't want to modify people's loans because they make less money [in fees]."

Huelsman points to another aspect of the ruling that she finds highly significant. It opens the door for homeowners who have faced MERS foreclosures to sue under the state Consumer Protection Act. "Characterizing MERS as the beneficiary has the capacity to deceive," the justices opined, adding that homeowners would have to prove they were damaged.

Attorney and fellow foreclosure fighter David Leen calls this "the biggest part" of the ruling, in part because under the Consumer Protection Act wronged parties can sue for considerable amounts.

Leen and Huelsman both say they need time to digest the ruling before deciding whether to launch into new litigation. Asked whether the ruling would set off a flood of lawsuits, Huelsman said, however: "It's certainly a possibility."